TAX NEWS - 2010

Tax Q&A: Children do not have to pay tax after inheriting their father's share of house

Division of estate property and investment choices in tax-free savings accounts were among the topics raised in recent reader questions. Here's what they wanted to know.

Q: "My father recently passed away and the home we shared was 50 per cent his and 50 per cent mine. There is no mortgage. The will states everything my dad owned be split between my sister, two brothers and myself. My siblings would like to sell me back their portion of the inheritance so I don't have to move. Will they need to claim this sale of inherited property on their income tax returns? Will I? Will my dad's final return have to include the sale of his portion to the succession?"

A: Partner Jonathan Bicher of accounting firm Nexia Friedman says that, on his final tax return, the father will have a deemed disposition of all his assets at fair market value, including his interest in the home. "If the home was his principal residence, the gain will be free of tax," Bicher said. If there's an additional increase in the market value of your father's share of the home by the time it gets sold to you, that gain will have to be reported by (and is taxable to) the estate. If it already has been transferred to the siblings, they'll have to report it on their returns. "You may wish to consult an adviser who can help you remove assets from the estate in the most tax-efficient manner," Bicher said.

Q: "What's the best investment choice for a tax-free savings account?"

A: Opinions vary. Some people have done very well with stocks, since the introduction of the TFSA in 2009 coincided with the bottom of the latest stock-market meltdown. But that meant picking auspiciously, since the annual TFSA contribution limit is $5,000. The consensus among experts seems to be that TFSAs are a good place to put fixed-income investments, because they're the ones taxed most punitively outside sheltered accounts. In a research report this month for investment firm MacDougall, Mac-Dougall & MacTier Inc., John Gallop compared the tax savings in TFSAs over five years of a GIC paying 3.7 per cent a year, a conservative stock with four-per-cent capital appreciation and a four-per-cent dividend, and an aggressive stock with 10-per-cent compounded growth. While the spread in returns significantly favoured the stocks, the difference in tax savings for a Quebecer in the highest tax bracket actually was quite slight. And that assumes the stocks will rise, which is no certainty. If they don't work out, you also won't be able to use the losses to offset capital gains the way you would outside a TFSA.